Wine co-operatives in Germany – homogeneous interests as determinants of success
Jon H. Hanf*
Erik Schweickert**
*Institute for Agricultural Development in Middle and East Europe,
Theodor-Lieser-Str.2, 06120 Halle (Saale), Germany, Email:
* *ORGA GmbH, Competence Centre for Wine-IT and Economics,
Fiduciastr. 20, 76227 Karlsruhe,Germany,
Abstract
Wine production in Germany has a tradition of more than 200 years in each of the 13 German quality wine-growing regions. Still today the structure of grape growers is dominated by small grape-growers. Therefore, most of the viticulturists are members of co-operatives.
Within our research we have observed that winegrowers still turn towards the “Winzergenossenschaften”. Hence, the increase in member and vineyards might indicate that die wine co-ops are successful. Thus, the aim of our paper is twofold. Firstly, we want to analyze the structure of this complex sector and the managerial construct strategic member groups. And secondly, we want to empirically test whether the formation of strategic groups is a driver of co-operative success.
Keywords: co-operatives, strategic member group, success factor
Wine co-operatives in Germany – homogeneous interests as determinants of success
1Introduction
Since years the total number of German co-operatives is decreasing. Causes for this development are manifold. However, one major reason of this development is the merger “mania” of German co-operatives. No other strategy seems to exist. This is true for primary co-ops, for secondary co-ops and even for regional co-operative unions. Aims of these mergers are securing “economies of scale and scope”, rationalisation and gaining a better market position. This orientation mirrors their way of doing business. Thus, the majority of the German co-operatives can be described as being rather quantity than quality orientated, not having well known brands and lacking end consumer orientation (Hanf/Kühl 2005). On the opposite, the following example shows that there are also some exceptions. “Westfleisch” a German co-operative slaughterhouse and meat processor is one of the big five in the meat business. By creating for pork and beef two similar vertically co-ordinated chain systems called “BestSchwein” and “TranspaRind” as a response of the meat scarce in winter 2000/01 Westfleisch laid the foundation of their recent business success. These chains are consumer oriented and therefore having an emphasis on traceability and transparency. In order to guarantee these demands only members are qualified for these chain systems which procure the piglets / calves from certificated breeders, raise the animal according to the “good veterinarian practice”, “good farming practice” and the “good manufacturing practice” of feeding. Through these barriers only selected members are able to supply Westfleisch with the demanded meat, which thereafter is processed and distributed by Westfleisch. The involved members benefit from their participation in these chains by getting granted a price premium and planning reliability. (Beuck 2002) This example shows that for some single co-operatives that are customer as well as member oriented the future looks very optimistically.
Even though in general co-operativesare going through a far-reaching structural change in Germany, with over 762 Million € turnaround per year the wine co-operatives performs this change slower. A reason might be the its emotional background of the product “wine”. Being so emotional the relationship between members and their wine co-operative is tighter (especially in the rural regions). The closing down of a local wine co-operative is perceived as a loss of own identity, so the readiness to change is low so that the honorary board and supervisory-board members absorb the dynamics of change (Pilz 2002). However, our empirical analysis reveals that wine co-operatives not only have a slower structural change instead even in some new co-operatives are formed. Interestingly, this is not only happening in Baden and Württemberg where traditionally wine co-operatives dominate the market instead also in the other wine producing regions of Germany an increase of the importance of wine co-operatives can be observed. We could show in our analysis that one driving factor was that the majority of (successful) wine co-operatives were forming member groups which had homogeneous business interests.
Our research had its focus on the possibilities of wine co-ops to create a competitive advantage. Being not allowed to buy and sell other goods the wine co-ops` advantage has to be located in the production of wine. Major influence factors of the a “good wine” are its type and taste that are in turn mainly dominated by the grapes and the work at the vines (Troost, 1988.). On account of this there is a direct relationship between the facility of the wine co-op to steer the whole production process and the success of the co-op. In this sense the study analyses the connection between the success of the wine co-operatives and the implementation of specialised wine growers. A characteristic of these groups of members is that they have homogeneous interests. Such groups can be called strategic member groups. A strategic member group is homogeneous within itself but is heterogeneous against other strategic member groups. Thus, a strategic member group could be a co-operative itself or could be a part of a co-operative.
Recapitulating the aim of our paper is twofold. Firstly, we want to analyse the environment of wine co-operatives and the managerial construct strategic member groups. We assume that having a common goal like producing a high quality wines e.g. the new profile wine concept will enhance the overall performance of these groups. Secondly we want to empirically find competitive advantages of wine co-operatives. Thirdly, we want to analyse empirically whether the formation of strategic groups is a driver of co-operative success.
2Wine co-operatives
2.1The structure of the wine sector
Wine production in Germany has a tradition of more than 200 years in each of the 13 German quality wine-growing regions along the rivers Rhine, Neckar, Main, Mosel, Saar, Ruwer, Ahr, Saale and Unstrut. The quality and type of wine as well as the quantity depends on different factors, wherein the grape variety plays an important role. Therefore, breeding new varieties and selecting traditional varieties took place in order to develop better wines with good quality and yields. The structure of the firms within the wine industry has an important impact on the technological practices, equipment and costs. It has to be considered that in Germany traditionally viticulture was one of different plantations on most farms, and the farms as well as the vineyards were very small. Corresponding with the structural change in the agricultural sector, the farms increased their acreage and production in combination with specialisation.
The necessity for high intensity of labour hours on the one hand and the simple equipment for small growers on the other, makes viticulture economically attractive for full-time as well as part-time farmers. Nowadays the structure of grape growers is dominated by small wine-growers. More than 34.375 wine-growers are producing grapes. 45 % of these wine-growers are cultivating less than 1 ha vineyard. Only about 2.000 wine-growers own more than 10 ha land planted with vines. More than 41,8 % process their own grapes. About 4.400 are producing and marketing bulk wines mainly, while about 10.000 estates are producing and marketing bottled wines. Most of the viticulturists are members of co-operatives. Those co-operatives process the grapes, produce must, vinificate (fermentation, fining, clearing and other oenological practices in the cellar for winemaking) and bottle and market the wine. The membership of co-operatives is widely spread under viticulturists in Baden, Württemberg, and Franken. In those regions, the grape-production is dominated by part-time viticulturists. Today, there are 246 wine co-operates with 64.000 members. However only 147 have their own vinification (see
Fig. 1
Fig. 1): The acreage planted with vines from members of wine co-operatives increased up to 31.342 ha, more than 31 % of all German vineyards. The total production of the wine-co-ops depends on usual vintage alternation. In the financial year 2001/2002 wine co-ops produced 3,1 million hectolitre wine, an amount of nearly 35 % of the total wine-production in Germany. Traditionally in Baden-Württemberg the importance of wine co-operatives is very high (75 % market share). However, especially in the regions where co-operatives have been traditional underrepresented (Rheinhessen, Pfalz and Mosel) the winegrowers turn towards the wine co-operatives. Hence, the increase in member and vineyards might indicate that vine co-operatives are successful and an alternative to the bulk-wine market.
2.2The profile-wine concept
In Germany however is not only the wine production multifaceted but also the traditional labelled wine-terminology is very complex. On account of this complexity people in Germany are often baffled by the jargon on wine labels (Johnson 1995). Especially younger customers chose imported wines with an easily understandable and asymmetric information reducing label (Schweickert 2001). Taking a look on different sales in
Fig. 1
Fig. 1 we see that only 19 % of the wine-sales are realised as a direct sale between consumer and wineries or wine co-ops. In these cases customers perceive the costs of information as positive. They are driving to the winery and recognise the buying as an event. However, for the majority of transactions no bilateral contact exists. In this case the wines are bought out of the shelves of retailers. Being most often occasional wine drinkers these consumers are looking for uncomplicated signals, reputation or brands, to generate qualitative safety. Examples like the wine brands “Balaton” or “Blanchet” indicate the enormous potential of branding. However the majority of wineries and also co-operatives are missing the financial potential in order to build up their own brand with a typical sensorial profile. Thus, in Germany a new wine-labelling-law has been established to compress a lot of (quality and sensorial) information in the category-terms ‘Classic’ and ‘Selection”. These two terms of the so called ‘profile-wine-concept’ should provide the needed signalling effect for the consumers (Schweickert 2001).
The German quality wine system has its focus on the bottled quality. In contrast origin and sensorial profile play the most important role in the Romance system of quality in France. Knowing the problems with the traditional wine labelling law the Germans wanted to give their wines more profile without changing the actual law. Therefore the new profile-wine concept realised a revaluation of the single product combined with stricter conditions concerning viticulture and vinification, which must be recognised in the taste of the wine in the bottle. Core of the profile-wine concept was on one hand to enforce the production of classic-styled wines with an easily recognisable origin type. On the other hand, the winemakers should get an alternative to the common wine-labelling in Germany. (Schweickert 2002)
In order to produce Classic wines winemakers have to produce wines above average quality i.e. these wines ought to be harmoniously dry in taste, and made from one of the traditional grape varieties, such as Riesling, Silvaner or Spätburgunder. In addition, they need to have a higher specific must gravity (+ 1 % vol.). The concept is designed to impart a clear profile regarding a wine’s quality and taste. On account of this, only wines that meet these criteria can be labelled Classic.
In 2001 the representatives of the Wine-Growers Association of the 13 German wine-growing regions decided a few traditional varieties for the production of Classic and Selection wines. Selection wines are considered the jewels of the wineries and wine co-ops. Under long run quality aspects of the last vintages the winemaker chooses the vineyards producing the grapes for the Selection wines. Already in the vineyard special quality security and control measures have to be introduced. Further on the chosen vineyards must be registered with the Federal Wine Authorities and the vineyard-plots have to be marked. Harvesting machines are not allowed. The specific must gravity has to be over 90° Oechsle (sugar content) and the grapes have to be hand harvested. The yield is reduced to a maximum 60 hectolitre per hectare. At last, the typical characteristics (variety, origin, etc.) are sensorial examined by a tighten up official assessment before the Selection wines can be sold from 1st September of the following year. They are sold by specialised retailers, wine-compartments in high-end retail store and direct from the producing co-ops or estates.
2.3The role of wine co-ops
Already the description of the wine sector showed that wine co-operatives have a special role in the German wine market. According to their statutes wine co-operatives (Winzer Genossenschaften) are self-helping organisations for wine-growers. The aim of the co-operative legal form is to improve the economic situation of the members by co-operation in vinification and marketing of the grapes or respectively their processed products. In many communities the wine co-ops are common institutions with a social impact like a local government (Hoffmann 2000). For predominant part-time wine-growers the wine co-ops are indispensable.
Having more than 68 non-vinificating- wine co-operatives („dry“ wine co-ops) in the wine-growing regions of Baden and Württemberg a „Central-wine co-op“ was established in each of these two wine-growing regions. Most of the „dry“ wine co-ops are linked to the „Central-wine co-ops“ by delivering the grapes of the whole vintage. It is also the business of the „Central-wine co-ops“ to stabilise the supply. Therefore a lot of the wine co-operatives with own vinification („wet“ wine co-ops) deliver a contractual share of bulk-wine from their vintage to the „Central-wine co-ops“. (see also
Fig. 1
Fig. 1) In Württemberg the „Central-wine co-op“ processes the grapes from the „dry“ wine co-ops and collects a defined amount of bulk-wines from some „wet“ wine co-ops. In the sense of a vertical supply chain the „Central-wine co-ops“ sells the bottled wines from most of the „wet“ wine co-ops nation-wide to retailers. Hence, not every single „wet“ wine co-ops needs to build up and maintain a distribution force for retailers. The „wet“ wine co-ops can focus with their marketing on specialized retailers (special wine stores) as well as the restaurant branch and direct selling.
Fig. 1: The German Wine Market and the Role of the Co-operatives
Hoffmann (2000) divided the „wet“ wine co-ops in three different groups. First, there are very successful „wet“ wine co-ops, which are active on a limited local or regional market called “Local Heroes”, because they have built up a very high consumer preference for their products in their local market. Also they often control the predominant part of the local vineyards. The second category are also successful „wet“ wine co-ops that have built with the name of their village or community a kind of brand. Such products have a wide quality spectrum which are often positioned in the middle and upper quality segment in the specialised retail and the restaurant branch. Third, there are less successful bigger local or district „wet“ wine co-ops positioned in the middle and upper quality segments as well as in the price-dominated retail and bulk-wine competition. Especially for „wet“ wine co-ops of the second and third category the prevailing structure of marketing channels (see also
Fig. 1
Fig. 1) with its high concentration in the retail sector as well as in the specialised wine stores makes the sales development very difficult. In particular wine co-ops face problems that are determined by their co-operative principles. Wine co-operatives are contractually obligated to sell exclusively products of their members. Thus, in contrast to private owned wineries they are not allowed to buy and afterwards sell ‘in’-products like Prosecco or trendy wine varieties. Being a long lasting plant a change to a new variety needs about fife years until the first vintage can be sold. On account of that a concept is required that enables co-ops to react more flexible to these variations in demand. Another problem of “wet” wine co-operatives is that usually it pays the same price for the same grape, graded to 6 predicate-levels which are determined by a minimum degree °Oechsle. Thus every viticulturist of the „wet“ wine co-ops can produce grapes for every wine he wants. No matter if the grapes match the quality criteria in taste. In order to solve the sourcing restraints and the quality issue the co-op should group its members. These groups have to produce different varieties and qualities.
3Strategic member groups in „wet“ wine co-ops
3.1“Strategic member groups”
The thoughts of the concept of the “strategic group” are based on the work of Michael Porter. His theories can be subsumed under the conception of the market based view of a firm. Wherein the competitiveness of a firm is determined by its ability to react on its environment. Other relevant constructs are the value chain and the generic strategies of cost leadership, differentiation market-wide and in niche markets (Porter 1980). The concept of “strategic groups” is correlated to the model of the five forces. An analysis of the branch might help to gain an overview over a certain branch but it is not useful to gain a detailed picture on the competitiveness of the companies (Kotler/Bliemel 1999). This can be gained by analysing “strategic groups” within the branch. A “strategic group” is defined as the a cluster of enterprises which have similar strategies within the same branch. This implies that within the “strategic” group firms are homogenous but they are heterogeneous towards firms of other “strategic groups”. As a result the main competitors are the firms within the strategic group (Müller-Stevens/Lercher 2001). For example in the branch of restaurants luxury restaurants do not face competition of the fast food industry. When the strategies of firms in the branch are getting more similar, the “strategic groups” themselves will approach. As nearer they are the competition between the groups will increase and the group boundaries will be crossed (Homburg/Krohmer 2003). Long term success of boundary crossing is mainly determined by the barriers of mobility. These barriers are all characteristics hindering firms to enter a different “strategic group”. Being also used for segmentation these characteristics are for example: vertical and horizontal integration, market segments, cost structure, distribution channels and size of organisation.